US consumer confidence plunges to 10 year low

Financial Times
Sep. 16, 2005

Hurricane Katrina delivered a serious blow to US consumer confidence, sending it to its lowest level for a decade in September, according to figures released on Friday.

The University of Michigan’s widely-watched initial sentiment index for September slumped from 76.9 from 89.1 last month - more than economists had expected. The worst deterioration came in the longer-term measures, with the index for the one-year outlook dropping 37 points.

Expectations about the future fell even more, with the index measuring the outlook for the year ahead down at its lowest level for almost 13 years.

But economists warned that the sentiment numbers were volatile and cautioned against reading too much into the one report. Economists will have to wait until October, when the full months figures become available, to assess the true impact of Katrina.

“The index was likely weighed down heavily by the emotional response to the devastating images,” said John Ryding, chief US economist at Bear Stearns, who thought the sudden spike in petrol - which is already subsiding - had a big effect on economic confidence.

Stephen Stanley, economist at RBS Greenwich Capital.added: “Just because people were extremely concerned in the first days after Katrina hit does not mean that spending has fallen apart.”

But the Federal Reserve is likely to be concerned by the sharp rise in inflation expectations - to 4.6 per cent from 3.1 per cent - their highest level since 1990. Longer-term expectations nudged up to 3.1 per cent from 2.8 per cent.

The Fed meets next week and is generally expected to raise interest rates by a quarter-point to 3.75 per cent.

Longer-dated Treasury bond yields have risen this week as investors have priced in the possibility that spending related to Katrina could widen the budget deficit and exacerbate inflationary pressures.

But Mr Stanley said he would expect a rebound in the indices, and softening of inflation in future reports. “I would only begin to worry if the moves seen in early September are sustained or magnified,” he said.

The Michigan data somewhat overshadowed a separate report showing the US current account deficit actually shrank in the second quarter.

The gap dropped to $195.7bn, but the narrowing came because the first-quarter record gap of $195.1bn was revised higher to $198.7bn.

Traders said the data had been largely overtaken by the release of the July trade deficit earlier this week which narrowed slightly to $57.9bn, and yesterday’s portfolio flow numbers for the same month, which showed unexpectedly strong US inflows.

The dollar was at $1.222 against the euro in New York trade, just off a two-week high reached on Thursday. Foreign investors put a net $87.4bn into US markets last month, led by purchases of bonds.

If the portfolio inflow is lower than the trade deficit, currency traders worry that foreign investors are losing their willingness to fund American borrowing at cheap levels, potentially weakening the dollar and pushing up borrowing costs.

“While the US twin deficits may remain a problem, they will have to be tomorrow’s problem rather than today’s,” said Michael Woolfolk, currency strategist at Bank of New York.